Trigger Cuts on Discretionary Side, Along With Defense, Would Devastate Economy

For all the talk of the “fiscal cliff” or “Taxmageddon,” precious little attention has been paid to one element of it – the automatic cuts, not to defense, but to the discretionary budget. Republicans – and the Defense Department – have been quick to denounce the defense cuts and look for a replacement plan. That sense of urgency has not been there on the discretionary side. And yet, those cuts would be just as debilitating, if not more so, in the near term.

In a paper for the Center for American Progress, Scott Lilly looks at the “swiftly ticking time bomb” that is the discretionary trigger. First of all, he finds that many contractors have already begun planning their budgets as if the cuts will happen, which will dampen spending at the end of the current fiscal year, starting in just a couple weeks, on July 1. He adds that the threat made by defense contractors also applies to the discretionary side:

Sequestration will cut government contracts with private industry in the coming year by about 10 percent, or $50 billion. Problem is, the contractors do not know which $50 billion of the approximately $530 billion the government spends on contract each year will be cut. That is a real problem because they are required by federal law to send layoff notices to any employee that is removed from their payroll at least 60 days, and in some states 90 days before the layoff occurs. Most will probably find that the judicious course is to send such notices to any employee that might be affected, and that could be most of the workforce of many contractors.

If contractors decide to notify half their employees of possible layoffs, it will mean about 3 million notices going out in September and October—hardly a good approach to strengthening consumer demand in a weak economy.

Lilly explains that the way most government agencies will react to the slashes to their budget will be through furloughs of up to six weeks. Beginning in January, those could happen at any time, and basically represent a pay cut of about 12-15% for those federal employees. That would happen on a rolling basis, and would be likely to cut consumer spending, especially in areas with a high concentration of federal workers, throughout 2013.

But the worst consequence comes from the areas where the federal budget intersects with the private economy. To take just one example:

Sequestration would cut about $1.5 billion from the Federal Aviation Administration budget, including possibly more than $900 million from the salaries of air traffic controllers. That would require a 10 percent to 12 percent cut in hours worked by controllers, forcing some reduction in takeoffs and landings. Currently, controllers manage airspace containing about 87,000 flights a day. It would be reasonable to expect a 10 percent reduction in hours worked to result in the cancellation or as many as 5,000 flights per day. How would that affect commercial airlines? Package delivery services such as FedEx or UPS? Or businesses whose sales forces rely heavily on air travel?

I could see why you would take a deep breath and potentially let this happen on the defense side, as the one chance to take a big swing at the military budget in a way where you need 60 votes in the Senate to overturn it. But it makes no sense to extend that to the discretionary budget. Those programs are often already underfunded – the country is not teeming with food inspectors – and hacking at them further will cause unnecessary disruptions and have a significant economic impact. These knock-on effects may not be picked up by all the forecasts that are already predicting dire scenarios for the economy. And it feeds into a narrative of government not working that serves the interests of conservatives. We already know from Europe how austerity can hit an economy still in the nascent stages of recovery. That’s coming to our shores in a little over six months unless we do something about it.

UPDATE: Patty Murray has an amendment to the farm bill that will commission a study to look into the effects of the trigger cuts at all levels of government. We already have that, courtesy Scott Lilly and CAP.

Trigger Cuts on Discretionary Side, Along With Defense, Would Devastate Economy

For all the talk of the “fiscal cliff” or “Taxmageddon,” precious little attention has been paid to one element of it – the automatic cuts, not to defense, but to the discretionary budget. Republicans – and the Defense Department – have been quick to denounce the defense cuts and look for a replacement plan. That sense of urgency has not been there on the discretionary side. And yet, those cuts would be just as debilitating, if not more so, in the near term.

In a paper for the Center for American Progress, Scott Lilly looks at the “swiftly ticking time bomb” that is the discretionary trigger. First of all, he finds that many contractors have already begun planning their budgets as if the cuts will happen, which will dampen spending at the end of the current fiscal year, starting in just a couple weeks, on July 1. He adds that the threat made by defense contractors also applies to the discretionary side:

Sequestration will cut government contracts with private industry in the coming year by about 10 percent, or $50 billion. Problem is, the contractors do not know which $50 billion of the approximately $530 billion the government spends on contract each year will be cut. That is a real problem because they are required by federal law to send layoff notices to any employee that is removed from their payroll at least 60 days, and in some states 90 days before the layoff occurs. Most will probably find that the judicious course is to send such notices to any employee that might be affected, and that could be most of the workforce of many contractors.

If contractors decide to notify half their employees of possible layoffs, it will mean about 3 million notices going out in September and October—hardly a good approach to strengthening consumer demand in a weak economy.

Lilly explains that the way most government agencies will react to the slashes to their budget will be through furloughs of up to six weeks. Beginning in January, those could happen at any time, and basically represent a pay cut of about 12-15% for those federal employees. That would happen on a rolling basis, and would be likely to cut consumer spending, especially in areas with a high concentration of federal workers, throughout 2013.

But the worst consequence comes from the areas where the federal budget intersects with the private economy. To take just one example:

Sequestration would cut about $1.5 billion from the Federal Aviation Administration budget, including possibly more than $900 million from the salaries of air traffic controllers. That would require a 10 percent to 12 percent cut in hours worked by controllers, forcing some reduction in takeoffs and landings. Currently, controllers manage airspace containing about 87,000 flights a day. It would be reasonable to expect a 10 percent reduction in hours worked to result in the cancellation or as many as 5,000 flights per day. How would that affect commercial airlines? Package delivery services such as FedEx or UPS? Or businesses whose sales forces rely heavily on air travel?

I could see why you would take a deep breath and potentially let this happen on the defense side, as the one chance to take a big swing at the military budget in a way where you need 60 votes in the Senate to overturn it. But it makes no sense to extend that to the discretionary budget. Those programs are often already underfunded – the country is not teeming with food inspectors – and hacking at them further will cause unnecessary disruptions and have a significant economic impact. These knock-on effects may not be picked up by all the forecasts that are already predicting dire scenarios for the economy. And it feeds into a narrative of government not working that serves the interests of conservatives. We already know from Europe how austerity can hit an economy still in the nascent stages of recovery. That’s coming to our shores in a little over six months unless we do something about it.

UPDATE: Patty Murray has an amendment to the farm bill that will commission a study to look into the effects of the trigger cuts at all levels of government. We already have that, courtesy Scott Lilly and CAP.